Risks and opportunities

In the following section, we present all risks and opportunities of significance to the Group that, as things currently stand, could affect the results of operations, financial position, and/or reputation of Deutsche Telekom and, via the subsidiaries’ results, the results of operations, financial position, and/or reputation of Deutsche Telekom AG. We describe the majority of the risks before the measures for risk containment are taken. If any remaining risks have been identified despite such measures for risk containment, they are labeled as such. If risks and opportunities can be clearly allocated to an operating segment, this is presented accordingly in the following.

In order to make it easier to understand and see their effects, we have allocated the individually assessed risks to the following categories:

Risks and opportunities from industry, competition, and strategy

Risks and opportunities relating to the macroeconomic environment. As an international corporation, we operate in a large number of countries, using a range of currencies. A substantial economic downturn could generally reduce the purchasing power of our customers and adversely affect our access to the capital markets. Exchange rate fluctuations could impact on our earnings.

The coronavirus pandemic threw the global economy into deep recession in 2020 and will also continue to shape its course in 2021. Leading institutes and organizations do not expect economic activity to return to pre-pandemic levels until the end of 2021/start of 2022. Apart from the coronavirus pandemic, the main risks to future economic development are potential geopolitical shocks and uncertainties from international trade conflicts.

Higher demand for certain telecommunications services means the impact of the coronavirus pandemic is being felt less severely by the telecommunications industry than by other industries. Nevertheless, there is still uncertainty regarding the extent to which business activities and thus the results of operations and financial position of Deutsche Telekom could be affected overall depending on how the pandemic develops. Possible factors could include renewed travel restrictions, the closure of Telekom Shops, disrupted supply chains, further declines in roaming and visitor volumes, falling terminal equipment sales, or a drop in the number of new contracts being taken out. In addition, corporate customer business may decline further, for example, due to delayed or changed customer decisions. The possibility of an increase in the number of consumers and business customers defaulting on their payments cannot be ruled out either. Deutsche Telekom has put in place cost-saving measures to mitigate potential effects on earnings. The coronavirus pandemic has a negative impact on the Group’s economic business risks. In the United States, Germany, and Europe operating segments, the risk significance was regraded from “low” to “medium.”

These risks are counterbalanced by opportunities, especially if the coronavirus pandemic can be contained on a lasting basis. After a harsh coronavirus winter, we expect the European economy to see recovery from spring 2021. The pace of economic recovery is also likely pick up in the United States. Many countries in Eastern Europe saw relatively robust economic growth in the coronavirus pandemic, and are expected to perform above the EU average again in 2021.

Risks relating to the market and environment. The main market risks we face include the steadily falling price level for voice and data services in the fixed network and in mobile communications. In addition to price reductions imposed by regulatory authorities, this is primarily attributable to ongoing intense competition in the telecommunications industry.

Competitive pressure is expected to continue, especially in the fixed network in Germany and the countries of our Europe operating segment. In the broadband market, the trend of disproportionate growth in the market shares of regional network operators and supra-regional specialist FTTH providers, particularly in Germany, continues to establish itself. They build out their own infrastructure and thus increase their market coverage. Increasingly this is done with fiber-optic infrastructure, thereby increasing their customer numbers and expanding their own value added. There is still strong competition to gain new customers by cutting prices and offering introductory discounts.

We expect ongoing price pressure for mobile voice telephony and mobile data services, which could adversely affect our mobile service revenue. Among the main reasons for this price pressure are data-centric, aggressively priced offers. Providers that do not have their own infrastructure (MVNOs) market such offers over the internet, for instance, while there is also the risk that smaller competitors will take unforeseen, aggressive pricing measures. Technological innovations such as the use of pure eSIMs in smartphones could put further pressure on prices by increasing the willingness of customers to switch providers.

Drillisch Netz AG acquired mobile spectrum in the spectrum auction held in Germany in 2019 and subsequently made a public statement declaring its intention to begin setting up a fourth mobile network over the next few years. Furthermore, Drillisch has defined access to an existing network via national roaming to be a prerequisite to building out its own network and has begun negotiations with all three German network providers. In fall of 2020, Drillisch called upon the Bundesnetzagentur in its role as arbitrator to move forward the negotiations on national roaming with Deutsche Telekom and Vodafone. Changes in the market for wholesale mobile services may affect the retail and wholesale area.

Another competitive risk lies in the fact that, both in the fixed network and in mobile communications, we are increasingly faced with competitors who are not part of the telecommunications sector as such, but are increasingly moving into the traditional telecommunications markets. This mainly relates to major players in the internet and consumer electronics industries. As a result, we are exposed to the risk of a further loss of share of value added and falling margins due to increasingly losing direct customer contact to competitors.

T‑Mobile US has multiple wireless competitors, some of which have greater resources and compete for customers based principally on service/device offerings; price; network coverage, speed, and quality; and customer service. Market saturation in the United States will continue to cause the wireless industry’s customer growth rate to be moderate in comparison with historical growth rates, or possibly negative, leading to ongoing competition for customers. T‑Mobile US expects that its customers’ appetite for data services will place increasing demands on its network capacity. The scarcity and cost of additional wireless spectrum, and regulations relating to spectrum use, may adversely affect T‑Mobile US’ business, financial condition, and operating results. T‑Mobile US faces intense and increasing competition from other service providers as industry sectors converge, such as cable, telecommunications services and content, and satellite television. Joint ventures, mergers, acquisitions, and strategic alliances in the wireless sector have resulted in and are expected to result in larger competitors competing for a limited number of customers.

The business combination of T‑Mobile US and Sprint was consummated on April 1, 2020. Implementing the business combination poses complex challenges for T‑Mobile US, which must be successfully overcome in order to realize the predicted synergies and to meet the conditions imposed by the authorities. The combination of the two companies to form the new T‑Mobile US affects all operational areas; for instance, the integration of the mobile networks and the IT and technology environments, customer management, sales, HR management, logistics, and the control environment. At the same time, it will be necessary to fulfill multiple conditions, including those agreed with the antitrust and regulatory authorities such as the Federal Communications Commission (FCC), the U.S. Department of Justice (DoJ), the supervisory authorities in various U.S. states, and the Committee on Foreign Investment in the United States (CFIUS). With the divestiture of Sprint’s prepaid business and the confirmation of an agreement to sell spectrum to DISH, on July 1, 2020, we fulfilled a major prerequisite of the U.S. authorities for approving the merger. Following the first half of 2020, we increased the risk significance in the risk category “Risks relating to the market and environment, United States” to “high” to reflect the challenges posed by the integration.

Our Systems Solutions operating segment also faces challenges. Continued strong competition and persistent cost pressure are adversely affecting traditional IT business. In addition, the technological shift toward cloud solutions and digitalization in the IT sector is prompting new, strongly capitalized, competitors to enter the market. This may lead to revenue losses and declining margins at T‑Systems. On the other hand, innovation areas such as artificial intelligence (AI) and industrial IoT create opportunities for new project business.

Opportunities relating to the market and environment. The telecommunications and IT market is extremely dynamic and highly competitive. The economic and competition conditions as well as customers’ changing wants and needs affect our actions and impact on our Company indicators. We generally expect the situation to develop as described in the section “Forecast.”

Risks relating to innovations (substitution). Innovation cycles are getting shorter and shorter. This confronts the telecommunications sector with the challenge of bringing out new products and services at shorter and shorter intervals. New technologies are superseding existing technologies, products, or services in part, in some cases even completely. This could lead to lower prices and revenues in both voice and data traffic. These substitution risks could impact our revenue and earnings. We deal with the impact of substitution risks by offering package rates, for example: we offer new and existing customers integrated solutions from our product portfolio. The introduction of the new 5G mobile standard as a technological innovation entails uncertainties in the form of upcoming spectrum auctions and their conditions of award, regulatory requirements, public discussions on security and electromagnetic compatibility, and the limited number of telecommunications hardware providers represented in planning scenarios.

Opportunities relating to innovations. In addition to the risks described, ever-shorter innovation cycles enable us to drive the digital transformation of our society and to provide our consumers and business customers with innovative products and solutions. That is why our innovation and product development activities are decisive when it comes to identifying opportunities and making the most of them in an increasingly competitive environment. In order to guarantee this, and do justice to the growing convergence of networks, products, and IT, we have combined all relevant functions under joint management in our Board of Management department Technology and Innovation, in order to enable closer integration of the areas of innovation, networks, IT, and security. By doing so, we are putting the development of outstanding, seamless customer experiences front and center, and this year we won awards, for example, for our smart-home products and our digital assistant “Frag Magenta.”

For further information on our innovation activities, please refer to the section “Innovation and product development.”

5G is the new generation of mobile telecommunications networks. Not only are we involved in a large number of different organizations and forums, we are also working intensively in collaboration with research institutions and industry to continue developing this standard, which will address an array of challenges facing telecommunication networks. These include purely technical requirements, such as achieving a substantial increase in capacity, bandwidth, and availability, and lower latency. In addition, there are fundamental issues, such as IoT communication on a large scale in the Internet of Things (IoT) and the growing need for reliability, security, and guaranteed service quality in industrial applications. 5G thus offers not only the immediate opportunity of cost-effectively managing rapidly increasing demands in existing business models going forward, but also opportunities for further business models by marketing network capabilities (e.g., network access, localization, security, identity, storage location, temporary storage, real-time processing) to relevant partners. We are already working on implementing the first use cases such as campus networks, mobile gaming, and mobile edge computing, in which data is processed in a decentralized manner (at the edges of the network). Together with other technologies like the NarrowBand Internet of Things (NB-IoT) and artificial intelligence (AI), 5G and edge computing provide the underpinnings for the further digital transformation of society.

Risks relating to strategic transformation and integration. We are in a continuous process of strategic adjustments and cost-cutting initiatives. If we are unable to implement these projects as planned, we will be exposed to certain risks. In other words, the benefit of the measures could be less than originally estimated, take effect later than expected, or not at all. Each of these factors, individually or in combination, could have a negative impact on our business situation, financial position, and results of operations.

Collaboration with Chinese suppliers was impeded in 2020 by the enduring trade conflict between the United States and China. Since 2020, on account of security concerns, the United States has restricted the use of U.S. technology for and by Chinese suppliers. A large number of countries in which Deutsche Telekom also operates (including Greece and Poland) supported this Clean Network initiative, which prohibits the use of products from critical vendors in telecommunications networks in the medium term. The long-running debate on 5G security in Germany may result in Chinese manufacturers being partially excluded from networks. In that case, we, too, would face a cost-intensive process of replacing all installed products.

Opportunities relating to strategic transformation and integration. The IP transformation (all IP) concluded in Germany in the reporting year offers many opportunities: the resulting logical network speaks one language and, in technical terms, functions largely independently of the services transmitted. This will enable efficiency gains, e.g., by reducing the complexity of maintenance and operation, switching off service-specific legacy platforms, and saving energy. In addition, all IP will generate growth potential in the short to medium term by improving the customer experience of existing services (e.g., better voice quality, more customer self-service, greater configuration flexibility) and, in the medium to long term, by providing an indispensable basis for convergence products and the Internet of Things (IoT), and by shortening the time to market for new products.

One of the key benefits of the all-IP network is that it also acts as a foundation for the future cloud- and software-based production of networks and services. It creates opportunities to increase efficiency, accelerate the provision of new services and features, improve quality, and tap into new revenue potential, while at the same time increasing automation.

We are driving forward the transformation of our IT using agile development. This approach allows us to exploit new opportunities for efficient IT production, through the modular provision of components as well as through accelerated development. Furthermore, agile development makes it possible to reduce big bang risks in the delivery of major software releases.

Risks and opportunities relating to regulation

In the following section, we describe the main regulatory risks and opportunities that, as things currently stand, could affect our results of operations and financial position, and our reputation.

Regulatory risks arise from telecommunications-specific statutory regulations at the national, European, and U.S. level, and from the consequent powers of national authorities to regulate or intervene in the market and limit our freedom as regards product design and pricing. Deregulation can give rise to regulatory opportunities. Regulatory intervention, which we can only anticipate to a limited extent, may exacerbate existing price and competitive pressure. There are concerns that regulation in Germany and other European countries may also impact revenue and earnings trends in the medium to long term.

Changes in regulatory policy and legislation

EU legal framework for telecommunications. The European Electronic Communications Code, which reforms central EU regulation of the telecommunications sector, primarily price and access regulation, spectrum policy, sector-specific rules on consumer protection, and the universal service regime, entered into force on December 20, 2018. The member states had 24 months as of that date to transpose the requirements into national law. However, implementation has been delayed in a number of countries, including Germany. The corresponding Telecommunications Modernization Act (Telekommunikationsmodernisierungsgesetz) is not expected to pass into law before the second quarter of 2021.

The revision of the EU legal framework for telecommunications remains part of a package of new EU legislation on the single market for electronic communications that provides for amendments to the regulations governing media services – mainly due to the growing importance of internet offerings – which are competing with the TV services previously focused on (e.g., regarding copyright law, laws for the protection of minors from harmful media, consumer protection, and the liability of internet service providers (in particular hosting) for third-party content). At the national level, too, specific amendments (for instance, to the German State Media Treaty and the German Telemedia Act, as well as to competition law) are being discussed in response to the phenomena of digitalization and convergence.

For further information on key regulatory decisions, please refer to the section “The economic environment.”

Awarding of spectrum

Risks could arise from the fact that inappropriate auction rules and frequency usage requirements, excessive reserve prices, or disproportionately high annual spectrum fees could jeopardize our planned acquisition of spectrum. Inappropriate conditions for the awarding of spectrum can include, for example, extensive build-out requirements and, in some cases, requirements to grant network access (national roaming, service provider access). By contrast, we see an opportunity in particular in the fact that such spectrum award procedures enable mobile network operators to obtain the optimum amount of spectrum for their future business. We would thus be equipped for further growth and innovation. The upcoming award procedures mainly relate to the auctioning of additional spectrum in the 700 MHz, 2,500 MHz, 3,400 MHz to 3,800 MHz, and the 26,000 MHz ranges. In addition, spectrum licenses, especially in the 900 MHz, 1,800 MHz, and 2,100 MHz ranges, will expire between 2021 and 2022 in some countries and need to be renewed. Award procedures are currently being prepared in Croatia, Poland, Romania, Slovakia, Hungary, and the United States.

For further information on spectrum auctions that were completed in 2020 or are still ongoing, please refer to the section “The economic environment.”

Areas in which national regulators may intervene

European and national laws and regulations grant national regulators extensive powers of intervention. In addition to the aforementioned Code, a case in point at the European level is the EU Regulation concerning the single market for electronic communications, which was enacted in 2015. It contains provisions on international roaming, net neutrality, and obligations to provide information, which restrict our product design options, mainly as regards retail products. The Body of European Regulators for Electronic Communications (BEREC) has published guidelines for implementing this regulation. Risks arise from how the national regulators interpret both the regulation and these guidelines. When the Telecommunications Modernization Act enters into force in 2021, the previously non-binding communication by the Bundesnetzagentur on the interpretation of certain parts of the regulation will be replaced by a legally binding administrative order issued by the Bundesnetzagentur. In addition, national regulatory authorities have wide-ranging powers under law to require products to be adjusted in order to enforce the regulation and to impose fines in cases of non-compliance.

Our Group companies in Germany and Europe continue to be subject to extensive regulation of wholesale products, obligating us to make our network and services available to our competitors wherever we are deemed to have significant market power as an operator. The national regulators regularly check and determine the corresponding terms, conditions, and prices of these wholesale offerings. The key wholesale products subject to regulation are unbundled local loop lines, bitstream products, leased lines, and the associated services. As of 2021, termination rates will be determined directly by the European Commission by way of a “Delegated Act.” In addition, European and national consumer protection regulations apply. In Germany, for instance, the Transparency Regulation came into force on June 1, 2017, the main objective of which is to enhance transparency and cost control with telecommunications services for consumers. In this context, the Bundesnetzagentur introduced a system that enables consumers to measure the bandwidths available on their fixed-network and mobile lines.

In addition to the requirements of telecommunications law, our media products are also subject to special European and national regulations under media law, as well as non-sector-specific regulations such as data and consumer protection. These include, in the broader sense, copyright law, regulations concerning the responsibility for published content, requirements in relation to ensuring the protection of minors in the media, and requirements in relation to the content and user interfaces of media distribution platforms. Barring any changes to its shareholder structure on the one hand (the Federal Republic and KfW being its major shareholders), or to the legal situation, or the prevailing opinions of media regulators on the other, it is unlikely that Telekom Deutschland will be granted a license to broadcast radio and television programs.

Operational risks and opportunities

Employees. Our employees play a crucial role in the transformation of Deutsche Telekom. Their skills are a key factor to our business success. The general high demand on the labor market, in particular for specialists in highly relevant areas such as IT, makes it difficult to recruit new employees. An inability to attract and/or retain the necessary experts would have a negative impact on our business in the future.

In 2020, we once again used socially responsible measures to restructure the workforce in the Group, mainly by means of severance payments, phased and dedicated retirement, internal retraining measures, and employment opportunities in public service for civil servants offered by Vivento. We will continue this restructuring in the coming year. If it is not possible to implement the corresponding measures as planned or at all (for example, due to limited interest in severance payments), this may have negative effects on our financial targets. To avoid the risk of high potentials leaving the Group as a result of the staff reduction instruments, we make sure that the arrangement is voluntary on both sides in each individual case.

The right of civil servants to return to Deutsche Telekom also carries risks: When Group entities that employ civil servants are disposed of, it is generally possible to continue to employ them at the Group entity to be sold, provided the civil servant agrees or submits an application to be employed at the respective unit in future. However, there is a risk that they may return to us from a sold entity, for instance after the end of their temporary leave from civil servant status, without the Company being able to offer them jobs. Currently 1,343 civil servants are entitled to return from outside the Group to Deutsche Telekom in this way (as of December 31, 2020).

Risks relating to IT/NT network operations. We have an increasingly complex information/network technology infrastructure, which we constantly expand and upgrade to ensure the best customer experience and consolidate our technology leadership. Outages in the current and also future technical infrastructure cannot be completely ruled out and could in individual cases result in revenue losses or increased costs. After all, our IT/NT resources and structures are the key organizational and technical platform for our operations. The ongoing convergence of IT and NT harbors risks. In order to counter these holistically, our network, innovation, and IT activities are combined under the Board of Management department for Technology and Innovation.

Risks could arise in this area relating to all IT/NT systems and products that require internet access. For instance, faults between newly developed and existing IT/NT systems could cause interruptions to business processes, products, and services, such as smartphones and MagentaTV. In order to avoid the risk of failures, e.g., due to natural disasters or fires, we use technical early warning systems and redundant IT/NT systems. The Computer Emergency Response Team (CERT) at Deutsche Telekom Security is in charge of protecting our business customers’ servers. In cloud computing, all data and applications are stored at a data center. Our data centers have security certification and meet strict data protection provisions and the EU regulations. All data relating to companies and private persons is protected from external access. Constant maintenance and automatic updates keep the security precautions up to date at all times. On the basis of a standardized Group-wide business continuity management (BCM) process, we also take organizational and technical measures to prevent damage from occurring or, if we cannot, to mitigate the subsequent effects. We also have insurance cover for insurable risks.

Opportunities relating to IT/NT network operations. The utilization of large data volumes (big data) from our networks can improve and speed up decision-making processes by enhancing transparency. It does so by shifting the basis for decisions from hypotheses to facts and, for example, enabling correlations to be recognized.

Our Systems Solutions operating segment covers innovative business areas in the digital transformation of business processes, such as the Internet of Things and cybersecurity. These business areas could develop faster than expected. As a pioneer of the digital transformation, we have an opportunity not only to participate in, but also actively shape, the market trend through a variety projects in the fields of healthcare and mobility solutions. In the ramp-up phase of these new business models based on M2M communication and big data, our partner-oriented approach is a highly promising way of contributing our core competencies – in cloud computing and cybersecurity – to various projects. What is more, we already have initial references in areas of the Internet of Things market, e.g., predictive maintenance.

As a technology and development partner for toll collection business in Europe, we already have a strong competitive position. We have earned valuable references in European toll collection projects in Belgium and Austria and through the planned launch of a Europe-wide toll collection system (Toll4Europe). This will help to give us an edge over our competitors.

Risks relating to the existing IT architecture in the United States. T‑Mobile US relies upon its systems and networks and the systems and networks of other providers and suppliers, to provide and support services. T‑Mobile US’ business, like that of most retailers and wireless companies, involves the receipt, storage, and transmission of customers’ confidential information, including sensitive personal information, payment card information, and confidential information about their employees and suppliers, as well as other sensitive information about T‑Mobile US, such as business plans, transactions, and intellectual property. Cyberattacks, such as denial of service and other malicious attacks, could disrupt T‑Mobile US’ internal systems, networks, and applications, impair its ability to provide services to customers, and have other adverse effects on its business.

Future viability of the IT architecture in the United States. In order to grow and remain competitive with new and evolving technologies in the industry, T‑Mobile US will need to adapt to future changes in technology, continually invest in its network, increase network capacity, enhance existing offerings, and introduce new offerings to address its current and potential customers’ changing demands. If T‑Mobile US is unable to take advantage of technological developments on a timely basis, then it may experience a decline in demand for its services or face challenges in implementing or evolving its business strategy. Following the business combination with Sprint, T‑Mobile US operates and maintains several customer billing systems and will continue to run them until all of Sprint’s legacy customers have been successfully migrated to T‑Mobile US’ existing billing systems. Unexpected difficulties or delays could cause major system or business disruptions.

Procurement. Deutsche Telekom cooperates with a variety of suppliers of technical (information and communication technology) and non-technical products and services. Products and services that might involve a higher risk include software and hardware, network technology components, and all products and services provided directly to end customers.

Supply risks cannot be entirely ruled out. Pandemics, other delivery bottlenecks, price increases, changes in the prevailing economic or political conditions, or suppliers’ product strategies may have a negative impact on our business processes and our results. Additional risks may also result from the dependence on individual suppliers or from individual suppliers defaulting. This is especially true for Chinese telecommunications suppliers. We employ organizational, contractual, and procurement strategy measures to counteract such risks.

Data privacy and data security. Following the successful implementation of the General Data Protection Regulation (GDPR) in 2018 and the harmonization of the increased data protection requirements under the GDPR in the EU and in Germany in 2019, these regulations were adjusted to new developments and further consolidated in 2020. For instance, the GDPR has introduced new procedures such as the Privacy Impact Assessment for assessing and documenting risks in data processing. We have already had such a procedure in place for ten years in the form of the Privacy and Security Assessment (PSA), which is fully digital. But such procedures also need to adapt to modern agile working methods and move with the Group’s changing organizational structures and ways of working. That is why, with the PSA@AGIL project, we have updated the procedure and also introduced new roles with explicit data privacy and security responsibility in agile product development. In addition to new ways of working, we have carefully examined technical developments and, for example, provided support within the Group for the service app solution introduced in many European countries, which our customers can use to manage their Deutsche Telekom products and contracts. Furthermore, we have supported the further development of our MagentaTV product, where, for example, we have introduced a privacy dashboard, which enables users to manage and change their data privacy settings. In addition, in collaboration with the Robert Koch Institute, SAP, and other partners, we developed the German coronavirus tracing app (Corona-Warn-App) and the subsequent European solution. Deutsche Telekom played a decisive role in the data privacy concept throughout the development of the app, coordinating between the partners, the Federal Government, and other parties involved. We were thus able to make a substantial contribution to fighting the coronavirus pandemic in Germany and Europe. In accordance with the requirements of the Federal Government, user IDs are stored in a decentralized manner, i.e., on the smartphones of the people you meet. The GDPR has created a good basis for data processing in the EU, based on a set of uniform rules. It assures Europe of a high level of data protection and, at the same time, will pave the way for new digital business models. However, experience gained so far shows that the intended harmonization is at risk. The regulatory authorities of the member states are called upon to strengthen coherence as part of the consistency mechanism. This relates in particular to positioning on individual data protection issues, but also to divergences in the application of the framework for fines.

On July 16, 2020, the European Court of Justice issued a landmark judgment (Schrems II). Europe’s highest court has addressed the concerns on the level of data protection in the United States and declared the adequacy decision of the EU Commission for the United States (Privacy Shield) void. Since that date, the Privacy Shield has been invalid. The standard contractual clauses on data privacy were confirmed in the ruling because they contain suitable protection mechanisms for data transfer in general. This ensures an adequate level of data protection can be observed by both contracting parties. However, extensive inspection obligations apply for the contracting parties and the data protection authorities to verify that the data protection level is in fact adequate. Extensive technical and legal checks must be carried out for all third-country transfers. Group Privacy is working with all affected Group units to work through the implementation requirements arising from the ruling and the publications of the European Data Protection Board to ensure that the necessary changes in business and contractual relationships can be made. In addition, as a result of the ruling by the EU Commission, new standard contractual clauses have been proposed. The draft stipulates that all agreements with companies in third countries must be amended to take account of these new clauses by the end of 2021. All companies in the EU, but also their contractual partners around the globe, must rise to the significant challenges of this ruling. However, since the ePrivacy Regulation has still not yet been adopted, there is yet another sector-specific regulatory challenge for the telecommunications sector in the EU. As telecommunications providers’ data processing options are substantially restricted compared with what is possible under the GDPR, innovative big data and artificial intelligence applications in the field of telecommunications cannot realize the same kind of potential as those of companies that are only subject to the GDPR. It would be a huge stride forward for telecommunication providers if the ePrivacy Regulation, which has been under negotiation at a European level since 2017, were to be adopted and the possibility of processing communication metadata for compatible purposes were to be permitted. This would be an important step towards innovation-friendly regulation while at the same time maintaining a high level of data protection.

IT security continues to pose major challenges. In addition to preventive measures such as integrated security in business processes and measures to raise security awareness among employees, we counter these challenges with increased focus on the analysis of threats and cyber risks. This is where our early warning system comes in: It detects new sources and types of cyberattack, analyzes the behavior of the attackers while maintaining strict data privacy, and identifies new trends in the field of security. Along with the honeypot systems, which simulate vulnerabilities in IT systems, our early warning system includes alerts and analytical tools for spam mails, viruses, and Trojans. We exchange the information we obtain from all these systems with public and private bodies to detect new attack patterns and develop new protection systems.

Cybercrime and industrial espionage are on the rise. We are addressing these risks with comprehensive security concepts. In order to create greater transparency and thus be in a stronger position to tackle these threats, we are relying more and more on partnerships, e.g., with public and private organizations. By means of the Security by Design principle we have made security an integral part of our development process for new products and information systems. In addition, we carry out intensive and obligatory digital security tests.

We are continually striving to accelerate our growth through IT security solutions. To this end, we have combined our security units within Deutsche Telekom Security. We want to leverage this end-to-end security portfolio to secure market shares and score points with security concepts on the back of megatrends like the Internet of Things and Industry 4.0. We are also continuing to gradually expand our partner ecosystem in the area of cybersecurity.

We provide regular updates on the latest developments in data protection and data security on our website at www.telekom.com/en/corporate-responsibility/data-protection-data-security.

Risks and opportunities arising from brand, communication, and reputation

Negative media reports. An unforeseeable negative media report on our products and services or our corporate activities and responsibilities can have a huge impact on the reputation of our Company and our brand image. Social networks have made it possible that such information and opinions can spread much faster and more widely. Ultimately, negative reports can impact on our revenue and our brand value. In order to avoid this, we engage in a constant, intensive, and constructive dialog, in particular with our customers, the media, and the financial world. For us, the top priority is to take as balanced a view as possible of the interests of all stakeholders and thereby uphold our reputation as a reliable partner.

Sustainability risks and opportunities. For us, comprehensive risk and opportunity management also means considering the opportunities and risks arising from ecological or social aspects or from the management of our Company. To this end, we actively and systematically involve all relevant stakeholders in the process so as to identify current and potential risks and opportunities. In parallel with our ongoing monitoring of ecological, social, and governance issues, we systematically determine our stakeholders’ positions on these issues. The key tools we use here are: our stakeholder survey; a document analysis, covering legal texts, studies, and media publications, amongst other things; our involvement in working groups and committees of national and international business associations and social organizations, e.g., GeSI, ETNO, BDI, Bitkom, Econsense, and BAGSO; stakeholder dialog formats organized by us; and our various publications, such as the press review and newsletter. We also integrate the biggest sustainability risks in our internal compliance assessment, thereby recording the associated positioning and development of measures in the various business areas.

For further information on sustainability, please refer to the section “Corporate responsibility and non-financial statement.”

We have identified the following as our main sustainability management issues:

• Reputation. How we deal with sustainability issues also entails both opportunities and risks for our reputation. A high level of service quality is one of the most important factors for improving customer perception. Customer satisfaction has been embedded in our Group management as a non-financial performance indicator to underline the importance of this issue. Transparency and reporting help to promote the trust of other external stakeholders in our Group. Our annual and CR reports also serve this purpose. However, issues such as business practices, data privacy, and work standards in the supply chain, conduct in relation to human rights, and ethical conduct in relation to and use of artificial intelligence also entail reputational risks: if our brands, products, or services are connected with such issues in negative media reports, this can cause substantial damage to our reputation. As part of our sustainability management activities, we continuously review such potential risks and take measures to minimize them. This includes systematically incorporating them in the Group’s internal compliance management system, so as to determine the relevance of the risks in relation to sustainability issues and their effect on reputation across units. We also ascertain how our products and services make a positive contribution to sustainability in order to enhance our reputation.

• Climate protection. We pursue an integrated climate strategy, which means focusing not only on the risks that climate change poses for us and our stakeholders, but also on the opportunities it presents. By 2030, ICT products and services will have the potential to save up to seven times as much in CO₂ emissions in other industries as the ICT sector itself generates, even taking into account the expected rebound effects (according to the GeSI Digital for Purpose study). Taking an optimistic view, this could mean a 9 % reduction in global CO₂ emissions by 2030. In addition, investments of around USD 3 trillion in innovative solutions are expected by 2030, which will not only expand the business, but will also support the SDGs. We are supporting this trend by evaluating our product portfolio to identify sustainability benefits. In addition, we want to continuously improve the ratio of the emissions that our products and services save to those generated by our own value chain. According to this figure, the positive CO₂ effects facilitated for our customers in Germany were 610 % higher in 2020 than our own CO₂ emissions (enablement factor of 7.1 to 1).

  Climate change risks are already visible in the form of increasingly extreme weather conditions. This is having a direct effect on our stakeholders, e.g., our customers, suppliers, and employees. The risk is assessed in relation to the continuation of operations as part of risk management and is managed at an operational level in the business units. Deutsche Telekom welcomes the targets behind the Task Force on Climate-related Financial Disclosures (TCFD) and is actively working to implement them. In a first step, we conducted a gap analysis on the coverage of TCFD recommendations. In a number of workshops with relevant players from technology, procurement, strategy, and risk management, we defined Deutsche Telekom AG’s key climate-related opportunities and risks and gave them an initial weighting. The next step will be to conduct a location analysis, with the example of Germany, of the physical climate risks in various scenarios (business as usual / 4-degree scenario).

  Detailed information on this will be published in our 2020 CR report.

  We can take further preventive action in this area by also reducing our own CO₂ emissions. For this reason, in 2019 we set ourselves the ambitious target of cutting 90 % of emissions across the Group by 2030 as compared with 2017. Climate protection also carries financial risks, whether from the introduction of levies on CO₂ emissions or increased energy costs, as well as stricter requirements for products, for example in relation to energy efficiency. The measures we are taking to counter these risks include measuring our own energy efficiency and finding ways to improve it. We have a Group-wide program to specifically address our supply chain and we are working to optimize our products and their packaging. In 2020, several of our national companies sourced 100 % of their electricity from renewables (Deutsche Telekom Group in Germany, Magyar Telekom in Hungary, OTE in Greece, as well as T‑Mobile Netherlands, T‑Systems Iberia, T‑Systems India, and all T‑Systems and GBS entities in Russia). A further six entities procured almost all of their electricity needs from renewable energies (T‑Mobile and T‑Systems Austria, T‑Systems Nordic, T‑Systems Netherlands, T‑Systems Brazil, and Hrvatski Telekom). All of these entities are thus actively working to manage the risks from climate change.

• Suppliers. We see more sustainability in our supply chain as an opportunity – for our reputation and our business success. Apart from the general risks associated with our global procurement activities, we can be exposed to country- and supplier-specific risks. These include, for example, the use of child labor, the conscious acceptance of environmental damage, or inadequate local working and safety conditions. We reduce these risks by systematically reviewing our suppliers. We conduct these audits within the scope of the Joint Audit Corporation (JAC). The aim of the JAC is to reduce sustainability risks in our supply chain and to improve ecological and social aspects, including the issue of human rights. As such, the audit is compliant with internationally recognized guidelines and standards, such as the ILO Core Labor Standards, the UN Guiding Principles on Business and Human Rights, and the OECD Guidelines for Multinational Enterprises. Our partnerships with suppliers that comply with international sustainability standards ensure a high level of product quality and reliable procurement. We have a special development program in place to help strategic suppliers introduce business practices that are both socially and ecologically acceptable while remaining economically efficient. This program showed measurable successes again in the reporting period and has three major advantages: It has a positive impact on our suppliers’ working conditions, enhances their profitability, and makes the economic relevance of sustainability clear for both sides, i.e., for our suppliers and for the Group alike. For instance, better working conditions at our suppliers reduces the number of work-related accidents as well as the attrition rate. That, in turn, ensures high product quality and increases productivity, while at the same time lowering costs for recruitment and training. Thus, not only are we strengthening our suppliers’ profitability and CR performance, we are also significantly reducing identified risks.

Health and environment. Mobile communications, or the electromagnetic fields used in mobile communications, regularly give rise to concerns among the general population about potential health risks. This issue continues to be the subject of public, political, and scientific debate. Acceptance problems among the general public mostly concern mobile communications networks and occasionally the use of mobile terminals such as smartphones, tablets, and laptops. The discussion has intensified repercussions for the build-out of the mobile infrastructure. In the fixed network, this can affect the use of traditional IP and DECT (digital cordless) phones, and devices that use Wi-Fi technology. There is a risk of regulatory interventions, such as tightened thresholds for electromagnetic fields or the implementation of precautionary measures in mobile communications, e.g., amendments to building law, or also the risk of a labeling requirement for handsets.

Over the past few years, recognized expert organizations such as the World Health Organization (WHO) and the International Commission on Non-Ionizing Radiation Protection (ICNIRP) have repeatedly reviewed the current thresholds for mobile communications and confirmed that – if these values are complied with – the use of mobile technology is safe based on current scientific knowledge. Various expert organizations, currently the ICNIRP, regularly review the recommended thresholds on the basis of the latest scientific findings.

We are convinced that mobile communications technology is safe if specific threshold values are complied with. We are supported in this conviction by the assessment of the recognized bodies. Our responsible approach to this issue finds expression in our Group-wide EMF Policy, with which we commit ourselves to more transparency, information, participation, and support of independent mobile communications research, far beyond that which is stipulated by legal requirements. We aim to overcome concerns among the general public by pursuing an objective, scientifically well-founded, and transparent information policy. We thus continue to see it as our duty to continue our trust-based dialog with local authorities and to ensure its successful progress. This particularly applies since our long-standing collaboration with municipalities to expand the mobile network was enshrined in law in 2013. Previously, this collaboration was based on voluntary self-commitments by the network operators.

Litigation

Major ongoing legal proceedings

Deutsche Telekom is party to proceedings both in and out of court with government agencies, competitors, and other parties. The proceedings listed below are of particular importance from our perspective. If, in extremely rare cases, required disclosures on the significance of individual litigation and anti-trust proceedings are not made, we concluded that these disclosures may seriously undermine the outcome of the relevant proceedings.

Prospectus liability proceedings (third public offering, or DT3). This relates to initially around 2,600 ongoing lawsuits from some 16,000 alleged buyers of T-Shares sold on the basis of the prospectus published on May 26, 2000. The plaintiffs assert that individual figures given in this prospectus were inaccurate or incomplete. The amount in dispute currently totals approximately EUR 78 million plus interest. Some of the actions are also directed at KfW and/or the Federal Republic of Germany as well as the banks that handled the issuances. The Frankfurt/Main Regional Court had issued orders for reference to the Frankfurt/Main Higher Regional Court in accordance with the German Capital Investor Model Proceedings Act (Kapitalanleger-Musterverfahrensgesetz – KapMuG) and has temporarily suspended the initial proceedings. On May 16, 2012, the Frankfurt/Main Higher Regional Court had ruled that there were no material errors in Deutsche Telekom AG’s prospectus. In its decision on October 21, 2014, the Federal Court of Justice partly revoked this ruling, determined that there was a mistake in the prospectus, and referred the case back to the Frankfurt/Main Higher Regional Court. On November 30, 2016, the Frankfurt/Main Higher Regional Court ruled that the mistake in the prospectus identified by the Federal Court of Justice could result in liability on the part of Deutsche Telekom AG, although the details of that liability would have to be established in the initial proceedings. Both Deutsche Telekom AG and some of the individual plaintiffs in the model proceedings have brought an appeal before the Federal Court of Justice against this decision. We continue to hold the opinion that there are compelling reasons why Deutsche Telekom AG should not be liable for damages. An adequate contingent liability has been recognized and is shown in the notes to the consolidated financial statements. In the annual financial statements of Deutsche Telekom AG prepared in accordance with German GAAP, adequate provisions for this risk have been recognized.

Claims relating to charges for the shared use of cable ducts. In 2012, Kabel Deutschland Vertrieb und Service GmbH (today Vodafone Kabel Deutschland GmbH (VKDG)) filed a claim against Telekom Deutschland GmbH to reduce the annual charge for the rights to use cable duct capacities in the future and gain a partial refund of the payments made in this connection since 2004. According to VKDG’s latest estimates, its claims amounted to around EUR 624 million along with around EUR 9 million for the alleged benefit from additional interest, plus interest in each case. Claims prior to 2009 are now no longer being asserted by VKDG. After the Frankfurt/Main Regional Court had dismissed the complaint in 2013, the Frankfurt/Main Higher Regional Court also rejected the appeal in December 2014. In the ruling dated January 24, 2017, the Federal Court of Justice reversed the appeal ruling and referred the case back to the Frankfurt/Main Higher Regional Court for further consideration. In its ruling dated December 20, 2018, the Frankfurt/Main Higher Regional Court again rejected the appeal and disallowed a further appeal. In similar proceedings, Unitymedia Hessen GmbH & Co. KG, Unitymedia NRW GmbH, and Kabel BW GmbH filed claims against Telekom Deutschland GmbH in January 2013, demanding that it cease charging the plaintiffs more than a specific and precisely stated amount for the shared use of cable ducts. In addition, the plaintiffs are demanding a refund of currently around EUR 570 million plus interest. The claim was dismissed in the first instance by the Cologne Regional Court on October 11, 2016. In its ruling dated March 14, 2018, the Düsseldorf Higher Regional Court rejected the appeal against this decision. In both proceedings, the plaintiffs have lodged a complaint against the non-allowance of appeal with the Federal Court of Justice. At present the financial impact of both these proceedings cannot be assessed with sufficient certainty.

Claim for damages in Malaysia despite an earlier, contrary, legally binding arbitration ruling. Celcom Malaysia Berhad (Celcom) and Technology Resources Industries Berhad are pursuing actions with the state courts in Kuala Lumpur, Malaysia, against eleven defendants in total, including DeTeAsia Holding GmbH, a subsidiary of Deutsche Telekom AG. The plaintiffs are demanding damages and compensation of USD 232 million plus interest. DeTeAsia Holding GmbH had enforced this amount against Celcom in 2005 on the basis of a final arbitral award in its favor. The main proceedings in the court of first instance began in January 2018. Adequate provisions for this risk were recognized.

Patents and licenses. Like many other large telecommunications and internet providers, Deutsche Telekom is exposed to a growing number of intellectual property rights disputes. There is a risk that we may have to pay license fees and/or compensation; we are also exposed to a risk of cease-and-desist orders, for example relating to the sale of a product or the use of a technology.

Further, Deutsche Telekom intends to defend itself and/or pursue its claims vigorously in each of these proceedings.

Proceedings concluded

Arbitration proceedings against T‑Mobile Polska S.A. In August 2019, Polish telecommunications provider P4 Sp. z o.o. had initiated arbitration proceedings against T‑Mobile Polska S.A. The plaintiff claimed around PLN 400 million (around EUR 93 million) plus interest as payment for its alleged entitlement to retroactive mobile termination rates. The arbitration proceedings filed by P4 Sp. z o.o. were dismissed in a final arbitral award dated December 30, 2020.

Anti-trust proceedings

Like all companies, our Group is subject to anti-trust law. In recent years, we have notably stepped up our compliance efforts in this area too. Nevertheless, Deutsche Telekom and its subsidiaries are from time to time subject to proceedings under competition law or follow-on damage actions under civil law. In the following, we describe material anti-trust proceedings and resulting claims for damages.

Claims for damages against Slovak Telekom following a European Commission decision to impose fines. The European Commission decided on October 15, 2014 that Slovak Telekom had abused its market power on the Slovak broadband market and as a result imposed fines on Slovak Telekom and Deutsche Telekom, which were paid in full in January 2015. Slovak Telekom and Deutsche Telekom challenged the European Commission’s decision on December 29, 2014 before the General Court of the European Union. On December 13, 2018, the court partially overturned the European Commission’s decision and reduced the fines by a total of EUR 13 million. Despite this positive judgment, on February 21, 2019, Slovak Telekom and Deutsche Telekom filed an appeal with the European Court of Justice against the ruling by the General Court. With this appeal, Slovak Telekom and Deutsche Telekom are seeking, inter alia, to overturn the findings of the European Commission determining Slovak Telekom’s behavior as abusive. Following the decision of the European Commission, competitors filed damage actions against Slovak Telekom with the civil court in Bratislava. These claims seek compensation for alleged damages due to Slovak Telekom’s abuse of a dominant market position, as determined by the European Commission. At present, two claims totaling EUR 112 million plus interest are still pending. It is currently not possible to estimate the financial impact with sufficient certainty.

Financial risks

Liquidity, credit, currency, interest rate risks

With regard to its assets, liabilities, and planned transactions, our Group is particularly exposed to liquidity risks, credit risks, and the risk of changes in exchange rates and interest rates. We want to contain these risks. Risks with an impact on cash flows are monitored in a standard process and hedged accordingly using derivative and non-derivative hedges. Derivative financial instruments are used solely for hedging and never for speculative purposes. The following risk areas – liquidity, credit, currency, and interest rate risks – are evaluated taking into account all hedges.

For further information on the risk assessment, please refer to the “Corporate risks” table above.

Liquidity risk. To ensure the Group’s and Deutsche Telekom AG’s solvency and financial flexibility at all times, we maintain a liquidity reserve in the form of credit lines and cash as part of our liquidity management. Since the successful business combination of T‑Mobile US and Sprint, T‑Mobile US has pursued its own separate financing and liquidity strategy.

At December 31, 2020, Deutsche Telekom (excluding T‑Mobile US) had standardized bilateral credit agreements with 21 banks for a total of EUR 12.6 billion. At all times, our liquidity reserve covered the bonds falling due and long-term loans of Deutsche Telekom (excluding T‑Mobile US) for the next 24 months at least (see graphic below). From today’s perspective, Deutsche Telekom’s (excluding T‑Mobile US) access to the international debt capital markets is not jeopardized.

Development of the liquidity reserve (excluding T‑Mobile US), maturities in 2019^a/2020

billions of €

Furthermore, bilateral credit lines with an aggregate total volume of USD 5.5 billion (EUR 4.5 billion) plus a cash balance of USD 10.4 billion (EUR 8.5 billion) were available to T‑Mobile US as of December 31, 2020. This liquidity reserve covers T‑Mobile US’ maturing bonds at all times for at least the next 24 months. From today’s perspective, access to the international debt capital markets for T‑Mobile US is not jeopardized.

Credit risks. In our operating business and certain banking activities, we are exposed to a credit risk, i.e., the risk that a counterparty will not fulfill its contractual obligations. To keep this credit risk to a minimum, we conclude transactions with regard to financing activities only with counterparties that have at least a credit rating of BBB+/Baa1; we also actively manage limits. In addition, we have concluded collateral agreements for our derivative transactions.

Currency risks. The currency risks result from investments, financing measures, and operations. Risks from foreign-currency fluctuations are hedged if they affect the Group’s cash flows. However, foreign-currency risks that do not influence the Group’s cash flows (e.g., risks resulting from the translation of assets and liabilities of foreign operations into euros) are not hedged. Deutsche Telekom may nevertheless also hedge these foreign-currency risks under certain circumstances.

Interest rate risks. Our interest rate risks mainly result from financing activities. In addition to the interest rate risk pertaining to variable-interest debt, this also includes the issue of new liabilities. With interest rates still at an all-time low, our risk assessment for a rise in interest rates is unchanged against the prior year. As such, the risk significance in the risk category “Liquidity, credit, currency, interest rate risks” remains at “medium” overall. Interest risks are managed as part of our interest rate management activities. A maximum, variable component is set each year for the debt position in euros; the debt position of T‑Mobile US in U.S. dollars primarily comprises fixed-income securities, some of which include issuer cancellation rights. The Board of Management and the Supervisory Board are regularly informed about the situation.

For further information, please refer to Note 41 “Financial instruments and risk management,” in the notes to the consolidated financial statements.

Tax risks

We are subject to the applicable tax laws in many different countries. Risks can arise from changes in local taxation laws or case law and different interpretations of existing provisions. These risks can impact both our tax expense and benefit as well as tax receivables and liabilities.

Other financial risks

This section contains information on other financial risks that we consider to be immaterial at present or cannot evaluate based on current knowledge.

Rating risk. As of December 31, 2020, Deutsche Telekom AG’s credit rating with Moody’s was Baa1 with a negative outlook, while Standard & Poor’s rated us BBB with a stable outlook, and Fitch confirmed its current rating of BBB+ with a stable outlook. Standard & Poor’s reduced its rating from BBB+ to BBB, as previously announced, upon the closing of the business combination of T‑Mobile US and Sprint. Over time, a lower rating is likely to lead to an increase in the cost of debt financing.

Sales of shares by the Federal Republic or KfW Bankengruppe. As of December 31, 2020, the Federal Republic and KfW Bankengruppe jointly held 31.9 % in Deutsche Telekom AG. It is possible that the Federal Republic will continue its policy of privatization and sell further equity interests in a manner designed not to disrupt the capital markets and with the involvement of KfW Bankengruppe. There is a risk that the sale of a significant volume of shares by the Federal Republic or KfW Bankengruppe, or any speculation to this effect, could have a negative impact on the price of the T-Share.

Our CR strategy enhances the value of our Company in the long term, which also has a positive effect of reducing business risks. Investors with a long-term horizon acknowledge this approach. In the capital markets, this is evident, for example, in the proportion of T-Shares held by investors that base their investment decisions, at least in part, on sustainability criteria. As of September 30, 2020, around 13 % of all T-Shares were held by SRI (socially responsible investment) investors, and 9 % were held by investors who manage their funds primarily in accordance with SRI aspects.

Impairment of Deutsche Telekom AG’s assets. The value of the assets of Deutsche Telekom AG and its subsidiaries is reviewed periodically. In addition to the regular annual measurements, specific impairment tests may be carried out, for example, where changes in the economic, regulatory, business, or political environment suggest that the value of goodwill, intangible assets, property, plant and equipment, investments accounted for using the equity method, or other financial assets might have decreased. These tests may lead to the recognition of impairment losses that do not, however, result in cash outflows. This could impact to a considerable extent on our results, which in turn may negatively affect the T-Share price.

For further information, please refer to the section “Summary of accounting policies – Judgments and estimates” in the notes to the consolidated financial statements.